You are not alone if you’re in debt. But if you’re debt is overwhelming, it may be time to seek help from a credit counselor. Credit counselors can help in the areas of money management, credit cards, budgeting, credit and debt reduction. But finding a reputable credit counselor takes some research.
When considering the services of a credit counselor keep a few things in mind.
1. Non-Profit Status
Most reputable credit counselors are non-profit and offer services at local offices, online, or on the phone. But be aware that “non-profit” status does not guarantee that services are free. Some credit counseling organizations charge high fees, which they may hide; others might urge clients to make “voluntary” contributions that can cause more debt.
Most credit counseling agencies have reasonable fees; an enrollment fee and a monthly maintenance fee. These fees should be straightforward. The enrollment fee should run no more than $50, and the monthly maintenance fees should be cheaper – in the $25 range. There should be no fees if you are in a state of financial hardship.
2. Debt Management Plan
Be wary of any company that immediately urges you to join a debt management plan. Before entering into a debt management plan make sure your credit counselor has thoroughly gone through your debt, expenses, income and assets. No one plan fits everyone. If you’re not careful you may find a company that will promise to ease your debt — but actually put you deeper in the hole.
Keep in mind that using a debt-management will make it difficult to qualify for new credit. When you enroll in a debt-management program, you write a monthly check to a credit-counseling agency and the agency pays your creditors. A comment stating that you’re paying an account through a credit-counseling agency appears on your credit report and remains until the account is paid in full.
3. Shop Around
With any other big decision, shop around. Be sure to ask for all prices and fees to be stated up front and put in writing. A reputable credit counseling agency should send you free information about the services it provides without requiring you to provide any details about your situation. A good place to start researching credit counseling agencies is at the National Foundation for Credit Counseling.
Once you’ve developed a list of potential consumer credit counseling agencies, check them out with your state Attorney General, local consumer protection agency, and the Better Business Bureau.
4. Will your credit score be affected?
Participating in credit counseling does not affect credit scores directly. Credit counseling may provide you with good financial management information and you may even attend classes to help you along the way. But when a debt is repaid through a debt management plan there will be an indication of credit counseling on your credit report. Even though it might not impact your credit scores, for some lenders enrollment in a credit counseling program is perceived the same as if you had filed for a Chapter 13 bankruptcy.
Make sure the credit counselor clearly indicates how the debt management plan will impact your FICO scores. Different consumer counseling agencies may use different descriptions. A non-derogatory notation like “Consumer counseling account” is neutral as long as the payment arrangements are maintained. Keep in mind that getting new credit is unlikely during credit counseling program. Even if you get a loan or credit cards, it will come with a very high-interest rate.